Real Green IT Machine (UVA-C-2295) Assignment: Spend some time thinking about the following question. In doing so, think through the components of the analysis you would use. Should the company build the proposed new data center? What type of capital project is this? How reliable are the forecasted benefits? What time horizon should be used?

Case Study is below

The case was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. was senior project leader in the Corporate Information Services Group at Central Bank, the third-largest bank in the United States. In November 2008, she and her boss were reviewing the economics of green practices as they applied to the banks next data center. Because the economics of computing had changed so dramatically, Ritts was certain she could justify the cost of investments and protect the environment at the same time. Todays servers are providing 75 times more performance for the same hardware costs than just eight years ago, she explained. In addition, performance per watt has increased 16 times, which means the performance per watt of a server has been doubling every two years. But Central Banks business applications growth had outstripped performance improvement in servers; the cost of power and cooling infrastructure had become the primary cost drivers in a data center. Central Bank was proposing a 60,000-square-foot center, which would replace its site in Charlotte, North Carolina, and, at the start, would contain 700 racks, each of which held 40 servers and their associated peripherals, memory, and disks. On average, such a rack consumed about 20 kilowatts (per hour)or 20 kilowatts 24 hours 365 days 2.6 efficiency $0.10/kilowatt hour = $45,600 per yearalmost as much as the three-year depreciation expense on those servers. The new centers energy efficiency was the crucial factor. The standard metric was power usage effectiveness (PUE), which was the total power usage of the data center divided by the power usage of the servers. The ideal PUE was 1.0. Ritts thought Central Bank might be able to reduce its efficiency rating from 2.6 to 1.30 if all the green technologies worked as planned. Built to Tier IV standards, the most stringent in the industry, the new center would cost more than $100 million and include a raised-floor building, an uninterruptable power infrastructure, energy recovery, and the technology for water cooling and recovery. Tier IV standards were designed to achieve 99.995% availability; they required multiple active power and cooling distribution paths and redundant fault-tolerant components throughout. For some servers, the water cooling would come right down to the chip level. Other energy-saving technologies staged data to disk drives based on frequency of use and switched off idle drives.-2- UVA-C-2295 Rittss boss wanted a quick analysis (see Exhibit 1): I want to see a rough cut on this by 3:00 p.m. Dont worry about getting quotes for everythingjust use the consultants estimates. Use annual cash flows; assume all the construction and the infrastructure are completed in year zero. Assume the disposal of our old building in that year as well. Assume a simple tax treatment; PUE no lower than 1.35; 10-year project life with a residual value equal to the remaining net book value at that time (Exhibit 2). Assume this will be on the East Coast, possibly in North Carolina, but we will also consider the Yakima Valley, near Microsoft, Yahoo!, and the other big data centers in eastern Washington state. They have the cheapest power rates in the country because of the hydro. Theres plenty of time for the detailed analysis later.-3- UVA-C-2295 Exhibit 1 THE REAL GREEN IT MACHINE (A) Assumptions (in thousands of dollars) New Structure Tax Depreciation Land $(2,000) Building (18,000) 20 years, 150% declining balance Infrastructure (82,000) 15 years, 150% declining balance Misc. (2,000) To be expensed Old Structure Fair Value Book Value Land and building $15,000 $7,000 20 years, 150% declining balance Infrastructure 2,000 46,000 15 years, 150% declining balance Other Servers (1U) $4 3-year, straight-line Tax rate 35% Hurdle rate 12% Source: Created by case writer.-4- UVA-C-2295 Exhibit 2 THE REAL GREEN IT MACHINE (A) Accelerated Depreciation Note: The 150% declining balance for 20 years means: divide 1.0 by the lifetime (years) or 1/20 = 0.05 and multiply that times 150% giving 0.075. Use that percentage every year on the remaining book value. So for an asset of $100 using 150% declining balance for 20 years, the first year deprecation would be 0.075 100 or 7.5. The book value at year end would then be 100 7.5 = 92.5. The second year depreciation would be 92.5 0.075 = 6.94. Similarly, the 150% declining balance factor for 15 years would be 1/15 = 0.0667 and 0.0667 150% = 0.100. This sort of depreciation schedule is used in the United States for IRS purposes. Source: Created by case writer. Book Value at millions years 1 2 3 4 5 6 7 8 9 10 Total End New: Basis Life Building 18 20 1.4 1.2 1.2 1.1 1 0.9 0.8 0.8 0.7 0.7 Infrastructure 82 15 8.2 7.4 6.6 6 5.4 4.8 4.4 3.9 3.5 3.2 Total: 100 9.6 8.6 7.8 7 6.4 5.8 5.2 4.7 4.3 3.8 63.15 36.85 Old: Land and Building 7 20 0.5 0.5 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3 Infrastructure 46 15 4.6 4.1 3.7 3.4 3 2.7 2.4 2.2 2 1.8 Total: 53 5.1 4.6 4.2 3.8 3.4 3.1 2.8 2.5 2.3 2 33.75 19.25 150% Declining Balance Depreciation Schedule